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Fact Sheet: Insolvency Reforms to Support Small Business

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Fact Sheet: Insolvency Reforms to Support Small Business Insolvency reforms to support small business The Government is making changes to our insolvency framework to better serve Australian small businesses, their creditors and their employees. The changes will introduce new processes suitable for small businesses from 1 January 2021, reducing complexity, time and costs for small businesses. The changes will enable more Australian small businesses to quickly restructure and to survive the economic impact of COVID-19. Where restructure is not possible, businesses will be able to wind up faster, enabling greater returns for creditors and employees. These reforms are the most significant changes to the Australian insolvency framework in almost 30 years. They form part of the Government’s JobMaker plan to ensure Australia emerges from the pandemic with a stronger, more resilient and more competitive economy. The need to give businesses and their creditors certainty is crucial to kick-starting confidence and activity as the economy transitions to the recovery phase. Our insolvency system needs reform An efficient and effective insolvency system is important in generating business dynamism which is needed to underpin our economic recovery. The system helps the movement of capital and jobs to more productive from less productive firms. It allows the efficient winding up of businesses, ensuring creditors and employees are paid fairly. The insolvency system is facing a number of challenges: • An increase in the number of businesses in financial distress because of COVID-19. • A ‘one-size-fits-all’ system, which imposes the same duties and obligations, regardless of the size and complexity of the administration. • Barriers of high cost and lengthy processes that can prevent distressed small businesses from engaging with the insolvency system early, reducing their opportunity to restructure and survive. On 22 March 2020, the Government announced temporary measures to support businesses to get through the Coronavirus outbreak. These measures have had a positive impact on allowing businesses to survive, with a 46 per cent decrease in the number of companies that have gone into external administration over the period from March to July 2020 compared with the same period last year. However, as the temporary relief expires at the end of December, the number of companies being put into external administration is expected to increase significantly, putting additional stress on the system. These reforms will help more businesses to successfully get to the other side of the crisis. FACT SHEET Insolvency reforms to support small business The package of reforms features three key elements: • A new formal debt restructuring process for small businesses to provide a faster and less complex mechanism for financially distressed but viable firms to restructure their existing debts, maximising the chance of them surviving and contributing to economic and jobs growth. • A new, simplified liquidation pathway for small businesses to allow faster and lower-cost liquidation, increasing returns for creditors and employees. • Complementary measures to ensure the insolvency sector can respond effectively both in the short and long term to increased demand and to the needs of small business. Together, these measures will reposition our insolvency system to reduce access costs for small business, to reduce the time they spend during insolvency processes, to ensure greater economic dynamism, and ultimately help more small businesses to survive. These measures will commence on 1 January 2021, subject to the passing of legislation. A new restructuring Small and medium enterprises may process to enable more warrant a different treatment from other firms in a debt restructuring strategy as small businesses to survive complex, lengthy and rigid procedures, Many small businesses will have significantly as well as required expertise and high increased their level of debt in order to remain in business during the Coronavirus costs of insolvency can fail to adequately outbreak. To support small businesses meet the needs of SMEs facing financial distress to recover, it will – OECD, Going for Growth 2018 be important that they can access a simple, cheap and faster means to restructure their debt. This will allow more businesses to go on trading, meaning better outcomes for the businesses, their creditors and their employees. Currently, requirements around voluntary administration in Australia are more suited to large, complex company insolvencies. The high costs of voluntary administration can also consume most or all of the value of a small business’s assets, making it harder for the business to restructure and reducing the business’s willingness to engage with the system. Voluntary administration also involves placing the business under the control of an administrator, which may deter many small and family businesses from accessing the process. A new, simplified restructuring process drawing on key features of the US Chapter 11 bankruptcy process will be introduced for eligible small businesses so that they can restructure their debts, maximising their opportunity for survival. The process will allow small businesses to access a single, streamlined process while allowing the owners to remain in control of their business. The Productivity Commission reported in 2015 that almost 60 per cent of companies that enter voluntary administration are deregistered within three years. The new restructuring process is not only aimed at enhancing the rate of successful restructuring outcomes, but also providing a pathway for distressed small businesses that historically would never have entered voluntary administration due to the costs and the loss of control associated with that process. 2 FACT SHEET Insolvency reforms to support small business Who can access the new restructuring process? The process will be available to incorporated businesses with liabilities of less than $1 million. Around 76 per cent of companies entering into external administration in 2018-19 had less than $1 million in liabilities. Of these, around 98 per cent are estimated to be businesses with less than 20 full-time equivalent employees. Larger and more complex businesses, as well as small businesses seeking more flexibility in how they may restructure, can continue to use voluntary administration. A ‘debtor in possession’ model The proposal adopts a ‘debtor in possession’ model. That means that the business can keep trading under the control of its owners, who know the business best, while a debt restructuring plan is developed and voted on by creditors. Business owners will be able to trade in the ordinary course of business when a plan is being developed; prior approval of the small business restructuring practitioner (the practitioner) will be required for trading that is outside the ordinary course of business. The business owners will be required to work with the practitioner to develop and put forward a restructuring plan and to provide information about the business’s financial affairs to the practitioner to assist with identifying creditors and to assist creditors in making an informed decision on the restructuring plan. The role of the small business restructuring practitioner The new process would streamline the role for, and powers of, the practitioner compared with the role played by an administrator in a voluntary administration. This reflects the reduced complexity of the new process and the businesses eligible to use it. The practitioner will: help determine if a company is eligible; support the company to develop a plan and review its financial affairs; certify the plan to creditors; and manage disbursements once the plan is in place. A practitioner will not be required to take on personal liability for a company or manage its day to day affairs. To support more practitioners being available to work with small business, they will be able to choose to register as a small business restructuring practitioner only. Their practice will be limited to the new simplified restructuring process. Qualifications required to register as a small business restructuring practitioner only will be in line with the streamlined requirements of the role. Registered liquidators will also be able to manage the new process. 3 FACT SHEET Insolvency reforms to support small business Supporting small businesses to access the new restructuring process It will take time for practitioners to become familiar with the new processes and to register as a small business restructuring practitioner. As a result, not all small businesses will be able to access the process immediately on 1 January 2021, after the existing temporary insolvency protections expire on 31 December 2020. To address this transitional issue, an eligible small business will be able to declare its intention to access the simplified restructuring process to its creditors, including through ASIC’s published notices website. Following the declaration, the existing temporary insolvency relief (relief from insolvent trading liability and around responding to statutory demands from creditors) would then apply to the business for a maximum period of 3 months, until they are able to access a small business restructuring practitioner or other insolvency practitioner. Relief would only apply to an individual business once a declaration is made. As a transitional measure, the ability to declare such an intention will be available until 31 March 2020. What protections will be in place to prevent misuse of the new restructuring
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